I hope the below article may help you in understanding the requirement of Accounting and Irrevocable Gratuity Trust for Group Gratuity Scheme for Discharge of Gratuity Liability.
1. An Overview of Gratuity Benefits
Gratuity benefits are governed by “The Payment of Gratuity Act 1972” and paid by the Company to an employee in addition to his salary on exit from the company. Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years, –
(a) on his superannuation, or
(b) on his retirement or resignation, or
(c) on his death or disablement due to accident or disease:
Provided that the completion of continuous service of 5 years shall not be necessary where the termination of the employment of any employee is due to death or disablement:
2. Calculation of Gratuity Benefits
Gratuity is a statutory right of employee whoever completes 5 years in the same organization and is a terminal benefit. It means, Gratuity amount will be determined when monthly terminal wages of the employee are known to the company. The terminal wages may include Basic & Dearness allowance only. The Gratuity Benefits are calculated using the following formula: –
(15/26) multiplied by (No of Completed Years on Exit) multiplied by (Terminal Wages)
3. Factors affecting Quantum of Gratuity Liability on Establishment.
Gratuity Benefits changes with the change in the following: –
(a) Past Service of Employee in the Company,
(b) Increase in wages of Employee in the Company,
(c) Change in Benefit Formulae of the Gratuity Benefit due to the amendment in the Act,
(d) Change in Ceiling Limit on Gratuity Benefits due to the amendment in the Act,
(e) Change in Vesting Condition for eligibility of Gratuity Benefits due to the amendment in the Act,
4. Provisions for Employer under Payment of Gratuity Act 1972 (Amended)
Section 7 of the Act has kept the obligation for payment of gratuity act on the shoulders of the employer, few provisions of this section act are listed below: –
i. As soon as Gratuity becomes payable, it employers’ responsibility to determine the amount of gratuity and inform it to an employee in writing (Refer subsection 2 of Section 7 of the Act).
ii. The employer shall arrange to pay the amount of gratuity within 30 days from the date when it becomes mandatory. (Refer Sub-section 3 of Section 7 of the Act).
iii. If the amount of gratuity is not paid within 30 days then the amount of gratuity and simple interest will be paid by the employer to the employee for the duration when the payment is not made to the employee. (Refer Sub-section 4 of Section 7 of the Act).
5. Accounting/Gratuity Trust Options for making the payment of Gratuity
Gratuity Liability increase exponentially with the increase in wages of employee and service period of the employee. Also, it is employers’ responsibility to pay the gratuity to the employee in any case. Establishments generally have 2 options for discharging the Gratuity Liability: –
Pay as go options –
In this option, the establishment makes provision of Gratuity Liability by taking an Actuarial Valuation Report/Certificate from Actuary to Comply with the requirements of Section 129 & 133 of the Companies Act, 2013 and in accordance with following Accounting Standards issued by the Regulators: –
In Indian context, Establishment falls in following three categories based on the basis of compliance criteria mentioned in Accounting Standards: –
(i) SME – In this case, company needs to disclose details as required for Clause (l) of Para 120 of AS 15 (Revised 2005
(ii) Non – SME – In this case, company needs to disclose details as required for Para 120 of AS 15 (Revised 2005)
(iii) Companies with Net-worth more 250 cr. – In this case, companies and their subsidiaries have to give disclosure of in compliance of IndAS 19 with comparative numbers of previous 2 years.
2. Gratuity Trust Option –
In this option, Management of the Establishment make a decision based on the Gratuity liability computed and certified by an Actuary to creates an Irrevocable Gratuity Trust in terms of Part C of Fourth Schedule of Income Tax Act, 1961 & Rule Number 98-111 of Income Tax Rules, 1962. and Trustee of the Gratuity Trust choose to Invest the Initial Contribution received from the Establishment into Bank Account of the Gratuity Trust, further into Group Gratuity Scheme of the Insurer (i.e. LIC, SBI, HDFC, Reliance, Bajaj Allianz, etc). There are 3 major benefits to the company in Investing an Irrevocable Gratuity Trust: –
(i) Contribution into Approved Trust is allowed as deductible Expense: – Provision of Gratuity Liability shown in the Balance Sheet is not allowed as deduction whilst computing net Income for Income Tax ((Refer Section 47A (7) of Income Tax Act 1961) whereas Initial and Annual Ordinary Contribution made by company into an Approved Gratuity Trust (Subject to condition specified in Income Tax Rules 103 & 104) is allowed as deductible expense under Section 36 (1) (v).
(ii) Interest received from Investment of an Approved Gratuity Trust is also exempted as Income Tax: – Interest received from Investment of an Approved Trust is also exempted as Income under Section 10 (25) (iv) of the Income Tax Act, 1961.
(iii) Anticipatory Service Benefit – When employer opt for Gratuity Insurance then Insurance company provide an additional benefit to the Nominee of Employee in event of death of Employee. For example, if retirement of company is 60 years and an Employee joins the company at age 25 years and he died after 3 years when his wages are 26,000/- per month then Death Gratuity payable to Nominee of the Employee will be: –
In case of pay as go option – Death Gratuity Payable to employee will be `45,000/- (i.e. 15/26)*26000*3)
In case of Gratuity Trust option, when invest is made in Group Gratuity Scheme of Insurance Company – In addition to death gratuity of `45,000/- an anticipatory Service benefit will also be payable by the Insurance Company, which is calculated as under: –
Age on the Date of Death……………………………………………….…28 years (i.e. 25 yrs. Plus 3 years)
Retirement Age of Company………………………………………………60 Years
Remaining Service of employee for which he would have worked….. 32 Years (i.e. 60 yrs. Minus 28 years)
Anticipatory Service Gratuity………………. (15/26)*32*26000/- = 4,80,000/-
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